Wills, tax planning and preparing for the future

1. Wills, tax planning and preparing for the future

2. Welcome Housekeeping rules! About Birkett Long

3. Why make a Will and what happens if you don’t, Emma Waters What is Inheritance Tax? And how to reduce your liability, Claire Read Planning for the future, including using financial products to minimise Inheritance Tax, Michael Cracknell Lasting Powers of Attorney, Ben Parmenter Seminar Topics:

4. Emma Waters Solicitor The importance of making a Will&The consequences if you don’t

5. Wills • Why don’t people have wills? • Why make a will? • Provide for the family’s future • Reliance on joint assets not ideal as one family may benefit over the other • To avoid IHT • Make provision for children • Make provision for vulnerable adults • To ensure your assets go to the people of your choosing

6. The requirements for a valid will • Over 18 and of sound mind • No arm twisting • In writing • Validly executed

7. What goes into a will? • Executors and trustees • Guardians • Funeral wishes • Specific items • Residue

8. What happens if you don’t have a will? • Example OneMarried couple with children • Example TwoUnmarried couples • Order of Distribution See sheet in information pack

9. Summary • Important to make a will • Review your will at least every 5 years

10. Claire Read Head of Personal Tax, Trusts & Probate Team - Chelmsford What is Inheritance Tax? And how to reduce your liability

11. Inheritance Tax is a tax on the assets that you own at your death Politics of Inheritance Tax are controversial What is Inheritance Tax & why do we have to pay it?

12. What is the Nil Rate Band? • 2010/2011 £325,000 • Anything over this is taxed at 40% • For example; you leave assets worth £500,000, the first £325,000 is free of Inheritance Tax and the balance £175,000 is taxed at 40%. So £70,000 IHT due.

13. What about married couples? • The government concession for married/civil partners means gifts between UK domiciled spouses are free of Inheritance Tax. • The transferrable nil rate band. The second spouse’s Inheritance Tax free allowance is increased by the amount of the unused nil rate band on the first death. Simply a couple may leave £650,000 tax free. An example:

14. Transferrable Nil Rate Band example: • Mr & Mrs Smith have assets worth £800,000 between them. • Mr Smith dies first and leaves £200,000 to their children. The remaining £125,000 of his nil rate band passes to his wife. • Currently this will give Mrs Smith a nil rate band of £450,000 (£325,000 of her own allowance plus £125,000 of her husband’s allowance) • Mrs Smith’s assets are £600,000 (£800,000 less the £200,000 given to the children) and everything above £450,000 will be taxed at 40%. Leaving an Inheritance Tax liability of £60,000.

15. Has it always worked this way? • No, prior to October 2007 you either used the nil rate band on the first death or you lost it! • Many married couples used special types of trust to plan on the first death. Although not needed now, they can still be useful for asset protection i.e. care home fees. • If you are not married or not in a civil partnership then the old style of planning is essential as unmarried partners cannot take advantage of the transferrable nil rate band.

16. What happens if your spouse died prior to October 2007? • The new rules are backdated and you can use your spouse’s unused nil rate band. For example: • Mr Smith died some years ago when the nil rate band was £250,000. He gave gifts of £150,000 to his children (60% of his allowance) and the rest passed to Mrs Smith. • Mrs Smith dies in 2011. She has her own nil rate band of £325,000 but she can also use her husband’s unused allowance. Mrs Smith gets another 40% of the current nil rate band added to her own allowance. i.e. 40% of nil rate band is now £455,000. Anything over this is taxed at 40%.

17. Ways to reduce Inheritance Tax • Ensure your beneficiaries have the evidence to claim the transferrable nil rate band. • PETs - make gifts. Must survive by 7 years for the gift not to be brought back into account. • SKI-ing • Life policies / Death in service planning

18. What constitutes a gift? • Something given with no strings attached! • Can you gift your house? Yes, but not effective for Inheritance Tax unless you pay market rent for living there or the person to whom you have given your house lives with you. NB – 7 year rule. • Holiday Homes / 2nd Properties – gift these?

19. Life Policies or Death in Service Benefit • Nominate the benefit of these to a trust set up during your life time rather than it going to your spouse. For example: • Mr and Mrs Smith have life cover of £200,000. Their combined estate is already worth £650,000 but on the first death the life cover is paid out to Mrs Smith. Her estate is now worth £850,000 and the extra £200,000 added will be taxed at 40% so £80,000 IHT due. • This could have been avoided if the life cover was paid into a trust of which Mrs Smith was a beneficiary.

20. Use exemptions: • Annual Exemption - £3,000 gift ignored for IHT purposes. Can carry forward for 1 year to increase to £6,000. E.g. Mr and Mrs Smith can give away £6,000 each year or if no gifts were made in the previous year £12,000. • Gifts to Charities & political parties are tax free • Small gifts exemption - £250 to each individual tax free • Gifts from Surplus Income – must be surplus income and intention to give some surplus income away on an annual basis. The amounts can differ each year as can the person receiving the gift. • Gifts in consideration of Marriage - £5,000 from each parent; £2,500 from each grandparent and £1,000 to anyone else • Woodland, Heritage, Farm and Business Relief

21. Michael Cracknell Independent Financial Adviser Discounted Gift Trusts

22. Discounted Gift Trusts Suited for clients with: • An IHT “problem” • Available funds to gift to a trust • The need for an income

23. Discounted Gift Trusts • Money gifted to trust is invested in a Life Company Investment Bond. • This could be an onshore or offshore version. • No access to capital is permitted once gift is made. • Any growth on the bond is immediately outside the donor’s estate. For example: £50,000 gifted to a DGT, after 2 yrs the value has increased to £55,000, the £5,000 is outside the estate for IHT purposes.

24. Discounted Gift Trusts • A level of "income" is selected at the outset. • The "income" level cannot be changed. • "Income" is payable until death of the settlor. • The "income" is very tax efficient - up to 5% per annum may be taken with no immediate tax liability until 100% of the original capital invested is exhausted. e.g.  A withdrawal at 5% per annum would last for 20 years, or 4% per annum for 25 years.

25. Discounted Gift Trusts • If the settlor lives for 7 years after making the gift to the trust, the total value is excluded from the settlor‘s estate for IHT purposes. • The right to obtain an "income" is not classified as a Gift With Reservation. • A "discounted value of a gift" is calculated based on the actuarial value of the income stream. This is calculated with reference to the age , the health and life expectancy of the donor. • If the settlor dies within 7 years of making the gift to the trust, IHT is normally applied on a lower discounted value.

26. Discounted Gift Trusts • All new applications are underwritten at the outset and a GP's report is obtained. • HMRC reserve the right to challenge any claims for discounts, especially where a death claim takes place within 2 years of settling money to a trust. • Medical report is obtained at the outset to verify any discounts given have been provided in good faith. • It is likely that an applicant with a medical history could be rated and have the normal discount available reduced.

27. Discounted Gift Trusts • The investment bond is written subject to a trust. • There are two versions - a) Absolute Trust or b) Discretionary Trust. • The Gift to an Absolute Trust is a Potentially Exempt Transfer "PET". • The gift to a Flexible Trust is a Chargeable Lifetime Transfer.

28. Discounted Gift Trusts • PET - there is no immediate tax charge. • Discretionary Trust - there could be a potential charge to IHT at 20% if the value of the money settled into the new Discounted Gift Trust, when added to the cumulative value of any Chargeable Lifetime Transfers made within the past seven years, exceed the nil rate band (£325,000).

29. Types of Trusts Absolute • Beneficiaries once named cannot be changed. • Can have impact on chosen beneficiaries in the event of their divorce, bankruptcy or death. Discretionary • Trustees have power to distribute capital to a wide range of beneficiaries.

30. Worked Example Background Mr Smith is 88 years old. Sadly he has suffered some major health problems over the past few years. Mrs Smith is 78 years of age and is of very good health.

31. Worked Example Personal wealth is circa £1m owned in equal shares (house £500,000 and savings £500,000) No gifts made in previous seven years. An income is required to subsidise pension income.

32. Worked Example Current Position Mr & Mrs Smith have left assets to each other in their wills and made no IHT planning. On second death, the residual value is to pass to their to children in equal shares.

33. Worked Example The IHT position will be as follows: £1,000,000 Less: £325,000 (1 person allowance) £325,000(second person allowance) £350,000 @ 40% = £140,000 potential IHT charge The clients wished to make some IHT mitigation

34. Worked Example Solution • Given the respective health and ages of Mr & Mrs Smith, a discounted gift trust was effected but made by Mrs Smith only. • As Mrs Smith was of good health, her application was underwritten and accepted on standard terms. The maximum discount was made available.

35. Worked Example • She elects to receive an “income” at 5% per annum of the original investment of £50,000 i.e. £2,500 per annum. This replaces the lost income previously obtained from capital invested in the trust and is paid free of any immediate liability to income tax.

36. Worked Example • The withdrawal level cannot be amended and Mrs Smith will receive £2,500 per annum for her lifetime (assuming the bond has sufficient value to support her level of “income”). • The actuarial value of the income stream is £20,834 and the discounted value of the gift is £29,166

37. Worked Example • If Mrs Smith died within 7 years of making the gift, IHT should be levied on a gift of £29,166 (rather than £50,000) • IHT saving = (£150,000 - £29,166) = £20834 @ 40% = £8,333.60

38. Worked Example • The trust chosen was a discretionary trust. No lifetime charge as total gifts below £325,000. Chosen as their 2 children are financially sound and this gave the flexibility to appoint capital to other family beneficiaries such as grandchildren.

39. Ben Parmenter Solicitor Lasting Powers of Attorney

40. Types of Lasting Power of Attorney Property and Financial Affairs LPA Health and Welfare LPA

41. Property and Financial Affairs LPA • You choose the person to act in connection with your financial affairs • This can include your property • To protect your assets

42. Health and Welfare LPA • You decide on medical treatment • Your chosen attorney decides where and how you live • You decide the level of treatment you wish and whether you are kept on life support

43. Do I need an LPA? • Plan for the future • You make the choices • Choose attorneys wisely

44. What Happens if You Don’tMake a Power of Attorney • An application is made on your behalf to the Court of Protection • Those closest to you will be affected • A Court Official may be appointed • Who can and will charge • Enormous cost implications

45. Summary • Two types - Property & Finances and Health & Welfare • You can have one or both • Office of the Public Guardian registers and oversees • May be used when the donor has capacity and if capacity is lacking • Your choices for your future

46. Regulatory Statements • Birkett Long LLP is regulated by the Solicitors Regulation Authority • Birkett Long LLP is authorised and regulated by the Financial Services Authority • Please note the value of any investment can fall as well and rise and past performance is no guide to the future.

47. Wills, tax planning and preparing for the future For further legal advice please contact: Chelmsford 01245 453800 Colchester 01206 217300 www.birkettlong.co.uk advice@birkettlong.co.uk